Banking Basics: How Do Money Orders Work, Anyway?

What is a money order? It’s simply a little piece of paper that allows the person named to receive a specified amount of cash. Money orders are widely available, cheap, and offer a more secure way to make a big purchase than paying with cash.

If you’re wondering how money orders work and why you would need one in the age of online banking, keep reading. We’ll cover the basics and more, including how to get a money order, how much it costs, the drawbacks of using one, and a few alternatives.

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How do money orders work?

When you purchase a money order, you pay the full amount upfront, plus a small fee. After verifying that the amount is correct, you’ll need to fill in your name and contact information on the front of the money order, plus the name of the recipient and their contact information.

A memo line allows you to specify what the money order is for. You then sign the front. Be sure to keep your receipt in case you need proof of payment or want to track when the order is received.

After that, you give the money order to whomever it is you’re paying, and they must sign the back and cash it to get the money. They’ll also need their ID to prove they’re the recipient.

Why would I need a money order?

Money orders are useful any time you don’t want (or aren’t allowed) to use a check or cash to make a payment. Here are a few situations where you might use a money order:

You need to send a secure payment through the mail: It’s unwise to send cash through the mail, for obvious reasons. A check can be a better option, but maybe you don’t trust the payment recipient with your bank account number. A money order alleviates that risk.

You’re buying something and the seller requires a money order: Maybe you’re buying a used car for a few thousand bucks from a private seller. That person might want you to pay by money order because they won’t have to worry about your personal check bouncing.

You need to pay some bills but you don’t have a bank account: Money orders require upfront payment. Whatever the reason you lack a bank account, money orders are still an option.

How to get a money order, and where to cash it in

You can get a money order at several places you frequent. Your bank might be the most obvious, but the post office, convenience stores, grocery stores, check-cashing shops, Western Union, and Wal-Mart all sell money orders, too.

If you’ve received a money order, most of the places listed above will cash it, too. Your best bet may be taking it to the institution that issued it — for instance, if it’s a U.S. Postal Service money order, take it to the post office to cash it. You can also deposit the money order into your bank account.

What does a money order cost?

Money orders are relatively inexpensive, depending on where you buy them. Ironically, banks may actually be your worst bet because fees are all over the map. For example, my bank, Fifth Third, only charges $1.25 for money orders up to $1,500, but Chase and Bank of America charge $5 with a $1,000 cap.

Your local Wal-Mart, which charges only 70 cents for money orders up to $1,000, is among your least expensive options. The U.S. Post Office charges a reasonable $1.20 for money orders up to $500, or $1.60 up to $1,000. Finally, Western Union doesn’t have a set fee, but you may pay up to $1 for money orders up to $1,000.

If you can’t use a personal check (or you don’t have a bank account), money orders are a relatively cheap and convenient alternative — you can usually get one at Wal-Mart or your local U.S. Post Office for a small fee. Photo: Random Retail

By now, you’ve probably noticed that money orders are usually capped at $1,000 or so. If you need to send more money than that, you’ll have to pay for multiple money orders.

For example, if I needed to send $2,200 via USPS money orders, I would pay $4.45 for three money orders (two for $1,000 at $1.60 each, and one for $200 at $1.20).

Are there any drawbacks to using money orders?

Money orders are relatively cheap and convenient, but there are a few downsides to note before they become part of your financial routine.

Fees can add up: Money orders are cheap, and if you only need one every once in a while, the fees shouldn’t deter you. But if you’re using money orders regularly because you lack a checking account, fees will add up fast — especially if you have to make sizable payments that require multiple money orders.

Big target for scammers: Unfortunately, money orders are notorious for attracting scammers and thieves, and they’re sometimes prohibited as a form of payment because of this risk. A money order theft may be as simple as someone intercepting the money order and attempting to put their own information over the recipient’s. Or a scammer may pay someone via a money order for more than the requested amount, then ask for the difference to be paid back. Unfortunately, the money order turns out to be counterfeit, and the recipient is on the hook for it.

Not as convenient as checks: Granted, it’s easy to get a money order since they’re widely available, but you often need to make a special trip and pay in person. Compare that to writing a check, or using online bill pay or a person-to-person payment service, where you may not even have to get out of your pajamas.

What are some alternatives to money orders?

If you’ve decided a money order isn’t what you need, there are a number of options that might fit your situation better without resorting to cash.

Personal checks

This is the most obvious alternative to a money order. Of course, there are situations where this isn’t an option: Maybe the seller won’t accept a check, or you don’t want the seller to have your banking information. Or you may lack a checking account.

If none of those situations apply, however, you’ll probably want to take advantage of the checking account you already have (and possibly pay for in the form of a monthly fee). If you have a checking account, you may also have access to online bill payment that lets you pay a bill without picking up a pen.

Cashier’s checks

If you want something more secure than a personal check, a cashier’s check can also be a good alternative to a money order. A cashier’s check is signed by a bank representative and drawn from a bank’s account after the funds are transferred from your own. Unlike a money order, there’s no cap on the amount as long as you have the necessary funds.

A cashier’s check may be preferable from a recipient’s standpoint since it’s coming directly from the bank, which can mean they get the money more quickly and with less chance for fraud. However, a cashier’s check costs a lot more than a money order — $7 to $10 is average — and you may need an account with the bank where you’re getting the check.

Wire transfers

A wire transfer is a good alternative to a money order if you need to send money as quickly as possible. As with a cashier’s check, you’ll often need to visit your bank (or a store such as Western Union or MoneyGram) in person. Make sure you know the recipient’s bank account and routing numbers, and be prepared for a relatively steep fee of at least $25 to $30 (or even higher if your money is going abroad).

Wire transfers are pricey, so you’ll probably only want to go this route if you’re required to, or you want the recipient to get cash as quickly as possible. Since there’s usually no hold on funds you wire, once the transfer is complete, it’s in the recipient’s account. Make sure you’re wiring funds to someone you trust — otherwise, you’ll have little recourse because the transaction is so fast.

Prepaid debit cards

If you don’t need to send your payment and are looking at money orders simply because you don’t have a bank account, consider using a prepaid debit card. These cards offer the convenience of plastic, but instead of being hooked up to a credit account, you load them with your own cash, typically online or at a variety of retail locations.

Prepaid debit cards can also be a great option if you don’t want to deal with the temptation of overspending with a credit card, or you want to keep credit card or bank account information as secure as possible. But note that many of these cards come with a range of fees that still make a traditional debit card linked to a checking account a better bet.

If you’re interested in prepaid debit cards and want some recommendations, check out your best bets in our guide to the Best Prepaid Debit Cards

Money orders are useful, but consider all your options

Money orders have a fairly defined niche in the world of personal finance: When you need a more secure alternative to sending cash but can’t use a check, they may be your best bet. Fees are low and they’re widely available at places you visit every day, no bank account required.

However, remember to evaluate alternatives to money orders, especially if you find yourself using them frequently. Cashier’s checks and wire transfers can add an extra layer of security if that’s your primary concern, but fees are higher. Prepaid debit cards might be worth a look if you’re using money orders because you lack a bank account.

If you’ve been denied a checking account because of previous mismanagement, be sure to look into second-chance checking accounts. These can get you back in a bank’s good graces, which means you may never have to pay for a money order again.